Doing Nothing For Pensions

At another of New Jersey governor Chris Christie’s town hall meeting on Tuesday it was reported:

Christie compared New Jersey to bankrupt Detroit, saying for the first time the state will be spending more on benefits for retirees than for current employees.

“We are paying more for people who are doing nothing than people doing something,” he said.

Christie said he plans to introduce a plan to address the pension system but did not elaborate.

“We have to worry about the greater good. And wishing it away is not going to make it go away,” he said. “We are going to have this conversation. I am going to force the conversation.”

Two points demand to be made.

Among the group Christie would consider as ‘doing nothing’ would be beneficiaries of these 467 who might quibble that they have already paid for their pensions while in the ‘doing something’ category would fall Christie staffers working on the next photo-op or bridge closing or scheme to welch on debts. Sometimes doing nothing is nobler than doing something.

In any honest system of remuneration pensions and retiree health care benefits being paid should be costing nothing since they would have already been pre-funded. That they were not is a failure of government to take seriously promises they have obligated taxpayers for and that the shortfall in New Jersey is now so large that it eclipses payments to current workers (presumably even when not including the pension and OPEB costs for those current workers since they are not being funded anyway) is less an indictment of the level of those benefits than it is of the system that allows convenient under-valuations.

There are a lot of New Jersey public workers who did a lot for their pensions and earned them. Chris Christie, so far, is not among them.

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12 responses to this post.

Nicely stated. I have contributed more to my pension than I have equity in my home–and it’s 6 figures. Of course, he says nothing of the fact that the reason that the state pays more now is because it paid less for the past 20 years. Compound interest!

It’s easy to demonstrate that ALL of your contributions (INCLUDING the investment returns thereon) will accumulate to a sum at retirement to buy no more than 10-20% of your promised pension.

Contributing 5% or 10% of your pay, while material to you, is minimal when the pension is so generous that to fully fund it over your working career (using appropriate assumptions consistent with what Moody’s now uses for it’s credit worthiness analysis) requires a level annual total contribution of from 30%-60% of pay depending on the generosity of the Plan formula and provisions.

Exactly – and a nice strawman setting the few “Bridgegate staffers” against the vast army of public sector ticks who receive benefits many orders of magnitude greater than their efforts would have produced in the private sector (which has phased out the kinds of defined benefit plans that remain the Blog author’s bread and butter).

John, With your knowledge and understanding of the drivers of this mess, you can help by playing a bigger role via offering solutions.

Notwithstanding your great (and rightful) frustration with the role actuaries have played in underfunding NJ’s Plans, I’m 100% certain you would agree that the generosity of the current plans is simply too great, unsupportable, and grossly unfair to taxpayers who get SO much less yet are assigned the “obligation” to pay for 80-90% of total Plan costs (even though they haven’t done so via actual contributions).

Why not come out in support of pension reductions ….. with a clear proposal for a reasonable reductions in the pension accrual rate (and increases in the full/unreduced retirement ages) for the future service of all CURRENT workers ?

That is because the government can put a gun to the head of taxpayers, throw them in jail or confiscate their property if the taxes to fund such largesse are not paid. A private sector company, on the other hand, goes bankrupt and hands the liability off to the PBGC. Those that have survived, have moved away from such plans out of necessity. Of course in the loony counter-world of marxocrats, the government need only decide what a fair wage is and legislate companies must pay it, Perhaps someday soon they will mandate great benefits for all private sector employees, at which point we will all be in the public sector.

Below is a comment I wrote and initially posted 5-10 years ago. So how did I do predicting our future ?
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There isn’t going to be a one-shot fix for the desperate state in which more and more Public Sector pension Plans are finding themselves. Most states, cities, & towns have a fundamental STRUCTURAL problem which MUST be addressed.

Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in incomparable jobs. This justified a better pension & benefit package.

Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRNT employees is “questionable”.

Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all address the STRUCTURAL imbalance between income and expenses.

Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we should make it less generous.

But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now equals or exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current Plans to continue, the hole gets deeper.

Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

It would seem that the Police Officers and Firefighters in Detroit did better in bankruptcy that we Jersey Public Safety Officers did when Christie passed pension “reform” They kept the entire amount of their pensions and their COLA’s were cut in half going forward. We lost our entire COLA (which I dare remind you was really only 60% of the CPI-W). Christie should just shut up and follow the law and contribute what he agreed to this year and going forward instead of putting his own spin on everything.Hopefully by fall we will have a new governor instead of the “deflector”.

JM, Don’t you really mean that hopefully by fall you will have a new DEMOCRATIC Governor who will gladly accept the Public Sector unions’ campaign contributions and election support in exchange for doing little-to-nothing to reign in the GROSSLY EXCESSIVE pensions and benefits promised all on Nj’s Public Sector workers ?

No resolution on the agenda but several Roselle residents came out tonight against the Mind & Body Complex. By order of appearance or, as you will see in the second video, disappearance: . . . . . . . . . . . . . . . . . . .